US Fed's rising rates to cast a cold shadow over Indian indices

NEW DELHI: The year 2022 was tough for markets and while the benchmark indices in India, BSESENSEX and NIFTY, managed small gains of sub 5 per cent, DOW, S&P and NASDAQ were negative.

The Indian indices survived on the back of very strong performance from the banking sector led by PSU banks, which had a great turnaround year. The composition of the banking sector in NIFTY is about 42 per cent.

What does 2023 have in store for the markets is on everyone's mind. The global scenario at present and in India is not the best that one could visualise or hope for. If 2022 was tough, 2023 would be even tougher.

The fact that interest rates would continue to rise would be a big dampener. The US currently has the Fed interest rates band between 4.50 and 4.75 per cent and this is expected to rise to 5.50-5.75 per cent by the mid of 2023 and remain there. It should be borne in mind that at the end of 2021, interest rates in the US were between 0-0.25 per cent. Stupendous rise indeed.

In India, the repo rate currently is 6.5 per cent, while at the end of December 2021, it was at 4 per cent. Very clearly, the rise is much more measured in India than the US.

With rising inflation and interest rates, there has been demand contraction across the board. Let me take you to a very popular economic index which was championed by none other than former Federal Reserve Chairman Alan Greenspan. This was known as 'MUI' or Men's Underwear Index.

This helped in determining a looming recession or the beginning of a recovery. US sales of men's underwear fell significantly from 2007 to 2009, during the Great Recession, but gained steam again in 2010 as the economy recovered.

Research says that underwear is the last to be replaced by men during a recession as it does not catch the eye of other fellow human beings. When things are looking up again, it's one of the first discretionary purchases a man might make.

Meanwhile, sales of most Indian hosiery players are down sharply year-on-year (YoY) in 3QFY23, indicating impact on consumer sentiment in the last quarter. Further, the same has happened to sales of paint companies and even the ever-popular pizzas.

GDP numbers for the third quarter have seen it slowing down to 4.4 per cent. FY23 GDP is now estimated at 7 per cent. Further, FY22 GDP is now revised to 9.1 per cent. There are signs all around us to be cautious, but not alarmed as yet.

The big positive is the fact that tax collection numbers, whether direct or indirect, are buoyant and with better compliance we seem to be on a strong footing.

The concern is the demand slowing down now even in semi-urban and urban areas. This is in addition to the slowing demand already being witnessed in rural India.

Coming to the markets and the primary markets at that. There was no issue post the Adani FPO for a month. This was followed by just one issue in the beginning of March and a few issues that are likely in the month of March.

Fundraising is becoming tough with markets not at their best and promoters currently unwilling to lower their expectations about valuations.

Come April, there would be a change in the documents being filed as the same would have to give the valuation number as well. The subjectivity and the premium that promoters and merchant bankers took on market performance would now disappear.

As far as the secondary markets are concerned, they are just about fairly valued post the correction witnessed in recent times. However, the opportunity in China and the US, which has corrected even more than India, makes those markets more attractive.

Further, Q3 results were a mixed bag and by and large there were no surprises which could make one more bullish for the fourth quarter results. Suffice to say that the usual bullishness on expectations of better results would be the only solace.

India's economy is highly dependent on the monsoon. With global warming and unusual weather worldwide, the monsoon would be a challenge and the agricultural output would play a major part in ensuring moderate inflation. If, however, God forbid, something goes wrong, the economy could get badly affected.

The Russia-Ukraine war has completed a year and there seems to be no resolution of date or anything on the horizon. When and at what terms would there be settlement seems a long way off.

Crude oil is a major import for India and fortunately, the Russia-Iran-India route has paid off. It ensures a steady supply at affordable rates and highly beneficial terms. This has also helped India get much better rates from other countries which have lost market share.

In summary, 2023 would be a tough year for markets and one should be prepared and safeguard oneself from possible setbacks.

It would be a good time to conserve cash and wait for the proverbial rainy day when all resources available may be less than the opportunities available looking at bargain rates.